A performance bond is a financial tool used to guarantee that in the event of a developer or contractor's default, funds are available to finish the construction of a Stormwater Treatment Practice (STP) and ensure its proper functioning. From the local government's point of view, the insolvency of a contractor during the construction contract will most likely result in delayed project completion and additional expenses for a completion contractor to finish the work. For this reason, it is common to require contractors to provide a bond from an independent bank or insurance company so that the local government can recover damages it may sustain as a result of the contractor's default up to a stipulated limit, often the estimated cost of construction for the STP.
Maintenance bonds are often required after construction to guarantee the performance of STPs. The role of a maintenance bond is to protect against design defects and/or failures in workmanship, and to guarantee that facilities constructed under a permit will be regularly and adequately maintained throughout the maintenance period. Maintenance bonds are often for a limited amount of time, at which time the responsibility for facility upkeep must be transferred to either a private party or to the local government. Due to the limited time-frame of maintenance bonds, they are often not a solution to ensure long-term maintenance.
For communities interested in using performance or maintenance bonds, some basic information should be established in the bond language:
1. Establish the total dollar amount required for the bond.
Many stormwater ordinances set the amount of a bond as a percentage of the estimated cost. This number can vary, but most communities tend to set the sum of the performance bond at 100% of the estimated cost of construction for the STP. Maintenance bonds often use a figure of 10% of construction cost as the required amount.
2. Specify the length of the bond.
Bond lengths are typically required for fixed rate of time following a project milestone, after which the local government releases the bond. For construction performance bonds, this is usually after completion and final approval of the STP and then posting of a maintenance bond. The maintenance bond typically guarantees that the project owner will maintain the STP for a fixed period of time, most often up to two years. At the end of this time, a local government may inspect the system and extend the maintenance bond requirement if all contract stipulations are not met.
3. Set the requirements for notice of defect or lack of maintenance.
Local governments should outline the time period for completion of corrections to an STP after a notice of defect. In addition, the bond should establish a time period for response from the bonding company if the permittee fails to meet their obligation.
4. Bond enforcement.
If the permittee does not successfully complete all required work or violates any requirement of the bond, the local government should spell out any enforcement measures it deems necessary to ensure project completion and proper maintenance. Bonds often provide for a local government to take corrective measures and to charge the cost to the permittee. These costs can include the actual cost of any work deemed necessary as well as administrative and inspection costs. Local governments may also reserve the right to solicit a new bid and contract for the correction of problems after expiration of the time limits, with liability for costs assigned to the current contractor and the insurance company or bank.
Samples of STP performance and maintenance bonds are provided below. Documents in .pdf format require the Adobe Acrobat reader, which you can download for free here.
Erosion and Sediment Control and/or Stormwater Management Performance Bond, City of Virginia Beach, VA (ZIP file)
This is an example of a performance bond for implementation of erosion and sediment control or stormwater treatment practices. The bond terminates 60 days from the date of completion of land disturbing activities.
Standard Maintenance Bond, City of Melbourne, FL
This maintenance bond guarantees the city's protection from faulty materials, faulty workmanship or faulty design of the new facility for two years after construction.
Irrevocable Letter of Credit, City of Greenacres, FL
This irrevocable letter of credit performs that same function as a performance bond.
Kitsap County, WA, Stormwater Management Ordinance Section 4.0: Covenants, Sureties, and Liability Insurance
This section of Kitsap County's Stormwater Management Ordinance sets forth requirements for maintenance bonds that extend to two-years upon completion of construction. At this time, the facilities are inspected and may be accepted by the County for public maintenance.